Cotton nears four-year high, joining in agriculture rally

LauraMandaro

SAN FRANCISCO (MarketWatch) -- Cotton futures rallied as much as 4% Monday, triggering maximum electronic-trading limits, as traders bet that the textile crop is poised to follow the heady increases of soybean and corn futures.

Cotton for March delivery jumped 3 cents to 72.96 cents a pound in heavy trade Monday morning, reaching the highest level for a front-month cotton contract since February 2004, before hitting what's known as a limit-up level in electronic trading. Under trading rules at ICE Futures U.S., the former New York Board of Trade, the cotton contract can only add 3 cents in one electronic trading session, where most trades take place. Cotton futures also reached limit-up on Friday.

At the close of electronic trading, which reopened just before 2 p.m. Eastern time, cotton ended 1.24 cents higher at 71.20 a pound -- a 1.8% gain for the day.

Driving crop prices higher, traders bet on an expected advantage from a weaker dollar, which make U.S. exports more attractive, and a valuation gap with other agricultural commodities, analysts said.

"It's the lower dollar and the grain markets rallying," said Ron Lawson, managing director at commodities trading firm Logic Advisors. In general, "no one wants to be short commodities," he said.

On Monday, soybean futures for January delivery hit another new record of $13.20 a bushel intraday on the Chicago Board of Trade, extending Friday's gains when the contract topped a record last set in 1973. Corn futures rose to an intraday high of $5.15 a bushel, also extending Friday's gains, and are trading near 12-year highs. Setting off the rally in grains Friday, a U.S. Department of Agriculture report showed global production of soybeans is likely to fall while corn supplies are tighter than it previously forecast.

With that report, "traders realize that they don't have to worry," said Darin Newsom, senior analyst with commodities researcher DTN in Omaha, Nebraska. "Not only were the numbers perceived as bullish, it's the last bearish threat," to the grains markets.

Price pressures

Agricultural staples like soybean and corn, and to a lesser extent cotton, have taken part in the general boom in commodities, which has been driven by accelerated industrialization and food demand in developing countries such as China.

Higher prices for grains that feed livestock and show up in everything from cooking oil to sweeteners, has added to overall consumer inflation. Food prices in November rose 4.8% year-over-year, the Labor Department said last month. It is scheduled to release its December consumer inflation report on Wednesday. See Economic Preview.

Makers of T-shirts and sweatshirts are likely to feel pressure from higher cotton prices. Gildan Activewear
GIL, +0.79%
(GIL) and Delta Apparel Inc.
DLA, -2.40%
last year warned that rising cotton prices posed a threat to their bottom lines. Hanesbrands Inc.
HBI, +1.53%
which owns the Champion and Hanes apparel lines, said cotton prices that top $1 and stay there could filter through to retail prices.

In the Labor Department's latest report on wholesale prices, the index for raw cotton prices rose 13.5% in November vs. a year-ago, less than the overall gain of 22% for unfinished materials, but still below wheat and soybean inflation.

Corn and soybean futures have more than doubled in the last two years. Production of gasoline-alternative ethanol has increased demands on the corn crop and caused some farms to switch from soybean to corn plantings, boosting prices of both crops. Wheat prices have also rallied as bad weather in several parts of the world chipped at stockpiles. Financial investors such as hedge funds have piled into agricultural assets along with oil and gold, helping stoke prices.

"They are moving on a huge inflow of investment money into commodities," said Newsom.

With most of the attention on corn and soybean, cotton has partially sat out the rally. The front month futures contract is up 25% in the past two years.

Commented Lawson of Logic Advisors: "It's the last [agricultural] product to double."

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